Overstock's $250 million ICO aims to disrupt Wall Street trading

Overstock.com’s (OSTK) CEO wants to redraw an essential way Wall Street operates using bitcoin technology. On Monday Patrick Byrne, who allowed Overstock to accept bitcoin starting in 2014, launched an initial coin offering (ICO) for tokens for a new trading platform called tZero. Byrne says it will be the future of trading. An ICO is similar to an IPO, but instead of issuing shares, issues digital coins.

In an interview with Yahoo Finance, Byrne said that the ICO would be capped at $250 million, with an option to green-shoe — short-sell an additional $50 million at the underwriting price to get to $300 million — if the demand is as high as expected.

“There seems to be overwhelming demand, and we don’t need more than $250 million to do all the disruption we plan on doing,” Byrne said of the capped ICO, which is only open to accredited and offshore investors. “I wish we could make it for everybody.”

Disrupting Wall Street

The disruption Byrne speaks of would essentially turn aspects of Wall Street on its head. The coins offered in Monday’s ICO aren’t designed to be the next bitcoin, but rather to serve as tokens to use the tZero trading mechanism, which will host future ICOs, trading, and short-selling. It aims to operate as a “blockchain-ified” Wall Street exchange – potentially as an alternative to the NYSE.

Owners of these tokens will get a dividend-like revenue share from tZero as well as the ability to use the token in the exchange to facilitate trading and shorting. The advantage of this hybrid-model over traditional exchanges, Byrne says, is lower cost, transparency from a distributed ledger, and less shady business. The platform would initially trade the tZero token but plans to expand. Byrne sees tokens as the future of securities, with ICOs replacing IPOs.

TZero, which is SEC compliant, could drop transaction costs 80% to 90%, according to Byrne, and completely disrupt securities lending, a mechanism that powers short-selling and is a significant revenue source for brokers.

ICOs have been rife with fraud and are a fairly complicated system for people who are unfamiliar. Byrne, who said he rarely applauds the SEC, said he appreciated the recent crackdowns, likening it to the crackdown of guys driving “around with stacks of stock certificates, selling to Grandma over the backyard fence” in the early 20th century. Byrne says some level of “paternalism” is necessary to make sure things are above-board.

A safer option?

Byrne maintains that once tZero is up and running, it’ll be safer than the current system of IPOs and traditional exchanges.

“[ICOs] will ultimately be better.” said Byrne. “I believe the market as it exists has a great deal of manipulation. We just showed up on the Reg SHO [a list of failed market settlements] list on Friday which means we’re being naked shorted again.”

A naked short is when someone sells a stock short without borrowing, something Byrne is notably against, and is not supposed to happen for the most part. This behavior isn’t possible with tZero because the system requires you to purchase a “digital locate receipt,” which proves there’s something available for you to sell, if you plan to short.

“In a blockchain capital market, all kinds of mischief that occurs on Wall Street can’t even occur,” said Byrne. “It doesn’t even depend on regulators to stop it — it can’t happen.”

OverStock CEO Patrick Byrne has a retail business but has been a major player in cryptocurrency for years. (AP Photo/George Frey, file)

In tZero’s blockchain, Byrne says, the trading and settlement aspects of Wall Street that are separated will be united, preventing weird stuff that happens between the two actions. “Ultimately this ecosystem will be safer,” Byrne said.

At the same time, Byrne has put Overstock’s retail business up for sale, looking to focus exclusively on the activities of Overstock’s blockchain arm Medici, and De Soto, Inc, a new project with Peruvian economist Hernando de Soto Polar, which aims to apply blockchain to formalize informal property rights to unlock capital. Wall Street is just one thing of many things Byrne is aiming to disrupt.